Over the past week, critics of the Department of Labor's contentious fiduciary initiative have issued a torrent of comments blasting the proposed regulation as costly, unworkable and harmful to low- and middle-income investors.

Supporters have countered that the measure is a needed consumer protection that would shield vulnerable investors from conflicted advice as they plan and save for retirement.

The initial comment period for the DoL's proposal ended Tuesday, and industry groups, consumer advocates and other regulators have inundated the department with letters of support or criticism of the effort to impose fiduciary responsibilities on advisors working with retirement plans or plan participants.

'FLAWED ASSUMPTIONS'

Much of the criticism from industry representatives centers on the notion that the proposal would amount to a prohibition on the brokerage model that currently serves small retirement plans and retail clients of modest means. Longstanding critics like the Financial Services Institute, SIFMA and the U.S. Chamber of Commerce all express support for the Labor Department's goal of improving the quality of advice provided to plans and consumers, but caution that, as written, the regulation will increase costs and limit access to retirement-planning services.

The FSI distills that strain of criticism in its comment letter, writing that the Labor Department's "proposal is based on flawed assumptions and creates a new regulatory regime that is too complex, too cumbersome and far too costly to manage."

"We are concerned that the proposal will make it significantly harder for consumers to receive high-quality, personalized retirement advice," the FSI writes. "We are especially concerned that advice for clients with small account balances will become cost-prohibitive if the proposal goes forward as written, thus decreasing investor access to retirement advice from a trusted advisor."

Meanwhile, the Financial Planning Coalition, a group representing the CFP Board, FPA and NAPFA, calls an expanded fiduciary standard "necessary and appropriate."

"The current regulatory framework allows advisors' interests to be misaligned with retirement investors' interests," the FPC writes. "Importantly, while many advisors seek to do what is best for their clients, others take advantage of regulatory gaps to steer their clients into high-cost, substandard investments that pay the advisor well, but eat away at retirement investors' nest eggs over time."

LABOR’S DEFENSE

That concern about conflicts of interest that could compel advisors to put their interests ahead of those of their clients is the starting point of the DoL's proposal. In defending the regulation, Labor officials have explained that advisors will remain free to offer advice that’s free of conflicts, such as through a fee-based arrangement common to the RIA channel. Brokers working on commission or through other models that present potential conflicts will be still able to do so, but only after entering into a contract with their client averring that they will act in the client's best interest.

That so-called best-interest conflict exemption is a principal target of industry groups' criticism of the fiduciary proposal.

The Insured Retirement Institute is one of several business organizations to take issue with the so-called BIC exemption, which it argues would entail a major disruption in the way advisors work with clients. The group is calling on the Department of Labor to modify the BIC provisions so that retail investors would not have to sign a specific contract, but that the best-interest obligations would instead be included in a unilateral advice agreement. Additionally, IRI is calling for the contract requirement to be triggered ahead of making a transaction, rather than providing a recommendation, and is asking the DoL to narrow the scope of the best-interest provisions.

"The definition of the term 'best interest' in the proposed BIC exemption is overly prescriptive and should be revised to make clear that advisors and financial institutions must always put their clients' interests first, but would not be required to completely disregard their own legitimate business interests," IRI writes.

NOT ENOUGH?

Some consumer advocates counter that the contract provisions don't go far enough. In comments filed with the DoL, the Institute for the Fiduciary Standard cautions that some firms might comply with the letter of the regulation but not its spirit.

"The main risk," the institute writes, "is that these firms will agree to meet the best interest standard and hold themselves out as such; yet, they won't materially change their practices and, instead, make voluminous arguments why their current practices are best practices. They will essentially place a bet that their legal arguments prevail in any subsequent enforcement action or legal challenge."

But some firms have argued that the BIC exemption is simply unworkable, and would compel them to abandon the brokerage channel in the retirement space. A top executive with Janney Montgomery Scott vowed as much at a recent SEC committee meeting.

A consortium of leading advisory players, including Schwab, LPL Financial and Ameriprise, is warning that small businesses and individual investors who don't meet the minimum requirements for fee-based accounts will lose access to retirement guidance.

"Retirement is too important to get wrong," the companies write.

"In limiting or eliminating the ability of investors to work with financial advisors in ways they find meaningful and valuable, the Department of Labor proposal will almost certainly result in less retirement savings for Americans at a time when savings rates are already low," they say. "If the proposal is finalized without significant changes we are concerned that the impact on investors would be contrary to its stated purpose."

FEE-BASED COMMISSIONS VULNERABLE

Despite the Labor Department's assurance that it is not taking aim at any specific business model with its proposal, William Lowe, president of Sammons Retirement Solutions, argues that it is doing just that by proposing what would amount to an effective ban on commissions.

"The proposal that is currently drafted makes utilizing commission-based solutions impractical or extremely difficult," Lowe writes in an email. "Fee-based solutions work well for many investors, but currently do not serve middle-income and small investors well. The proposal drives investors to utilize fee-based accounts, even if the commission-based solutions work better for them."

Still others take aim at the Labor Department on philosophical and procedural grounds, including fellow regulators. SEC Commissioner Daniel Gallagher, an outspoken critic of the fiduciary initiative, calls the proposal a "fait accompli," suggests that "the comment process is merely perfunctory," and dismisses the undertaking as "rampant nanny-statism."

"The proposal is grounded in the misguided notion that charging fees based on the amount of assets under management is superior in every respect and for every investor to charging commission-based fees," Gallagher writes. "It brazenly dismisses both suitability as the proper standard of care for brokers and the FINRA arbitration system as a mechanism to resolve disputes between financial professionals and their clients -- good for plaintiffs' lawyers, bad for investors."

QUALIFIED PRAISE

FINRA got in on the act, as well, with a slightly more conciliatory filing that praises the DoL for working toward a best-interest standard and "its readiness to engage in a dialogue with regulators, investors and other interested parties."

However, the industry regulator warns that the Labor Department is veering out of its lane in "imposing different standards on different accounts," when the SEC and FINRA already sufficiently oversee the activities of broker-dealers, calling the DoL's effort a "fractured approach" that will create confusion in the market.

"The proposal does not incorporate existing regulation and introduces new concepts that are fraught with ambiguity," FINRA writes. "The proposal would impose a best-interest standard on broker-dealers that differs significantly from the fiduciary standard applicable to investment advisors registered under the federal and state securities laws, and it would impose the best-interest standard only on retirement accounts."

The Department of Labor is planning to hold a public hearing on its fiduciary proposal in August, to be followed by a month-long comment period.

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